UK watchdog checks on commodity warehouses, prepares for EU abuse rules


* Warehouse visits in preparation for Markets AbuseRegulation

* MAR will place strong focus on physical commodity market

* London Metal Exchange also consulting UK watchdog on rulechanges

By Susan Thomas

LONDON, Oct 15 (Reuters) - Britain's financial watchdog saidofficials are visiting commodity warehouses in Europe to see howthey operate, in preparation for tough new EU market abuse rulesas regulators focus unprecedented scrutiny on physical tradingpractices.

For decades, traders have made money from their knowledge ofshortages and surpluses of physical commodities, which they sayenables them to play a vital role in balancing global markets.

But pressure from campaigners and politicians to crack downon what they see as speculators pushing up commodity prices,coupled with concern over possible rigging of market benchmarks,are putting commodities on a tighter regulatory leash in Europe.

The European Parliament last month endorsed a politicalagreement on Market Abuse Regulation (MAR) which will put inplace rules to prevent, detect and punish market abuse.

The rules are designed to stamp out rigging of commodity andinterest-rate benchmarks, forcing transparency onmulti-trillion-euro markets that have previously escapedscrutiny.

Under MAR there will also be increased cooperation betweenfinancial and commodity regulators.

"We have lots of forthcoming changes coming in under MAR,and that's going to give a much stronger regulatory emphasis tothe physical commodity market," a Financial Conduct Authority(FCA) spokeswoman told Reuters.

"So as part of that we have been visiting a number ofphysical market participants and infrastructure providers aspart of preparation for that. We have visited warehouses in anumber of jurisdictions."

Industry sources confirmed that FCA officials had visitedcommodity warehouses in recent weeks and had asked about theiroperations.

In the face of shrinking profits, many trading firms andbanks have sought to extend their control of supply chainsthrough buying physical assets such warehouses and refineries.


The FCA's move comes as the London Metal Exchange (LME), theworld's largest metals marketplace where benchmark prices formetals like copper and aluminium are set, grapples with itscrisis-hit warehousing system.

The LME is consulting with the FCA on proposed sweepingchanges to its warehousing policy after complaints from endusers including major beverage can makers about long wait timesfor metals and inflated costs.

"The regulators here always want to be involved in thesethings, so yes," LME Chief Executive Garry Jones said last weekwhen asked if the LME was working with the FCA on itswarehousing consultation.

To support physical delivery of its contracts, the LMEapproves and licenses a network of more than 700 warehousesacross 36 locations around the world.

But the business has stoked controversy as warehouse firmshave made money by building up stocks and allowing queues togrow for clients seeking to withdraw material, all the timecharging rent for storage.

End users say those steps have caused long wait times inwarehouses which have distorted supplies and inflated physicalprices to record highs.

The LME launched a consultation on the proposals in July,and is still considering the responses from the metals industry.It is due to hold a board meeting this month to discuss theplan, but there is no date yet for an announcement.

"We regulate the LME but we don't directly oversee theirwarehouses, but as we have a regulatory interest in them we havean interest in the consultation," the FCA spokeswoman said.

"There is a lot of discussion about particularly the LME andparticularly aluminium. This is a separate piece of work to thatdriven by changes in MAR."

The LME, along with Wall Street banks Goldman Sachs and JPMorgan and mining and metals company Glencore, have been hit with more than 10 lawsuits by consumers,distributors and others alleging aluminium price fixing.

U.S. regulators and politicians have also questioned whetherWall Street's involvement in risky commercial activities couldpose a threat to their financial soundness as they try to endthe era of the "too big to fail" banks.

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